We're Watching These Trends At Modern Healthcare Technology Holdings (HKG:919)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Modern Healthcare Technology Holdings (HKG:919) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Modern Healthcare Technology Holdings:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.079 = HK$23m ÷ (HK$681m - HK$394m) (Based on the trailing twelve months to September 2020).

Thus, Modern Healthcare Technology Holdings has an ROCE of 7.9%. On its own, that's a low figure but it's around the 9.3% average generated by the Consumer Services industry.

View our latest analysis for Modern Healthcare Technology Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Modern Healthcare Technology Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Modern Healthcare Technology Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 44%, but since then they've fallen to 7.9%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Modern Healthcare Technology Holdings has done well to pay down its current liabilities to 58% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 58% is still pretty high, so those risks are still somewhat prevalent.

Our Take On Modern Healthcare Technology Holdings' ROCE

We're a bit apprehensive about Modern Healthcare Technology Holdings because despite more capital being deployed in the business, returns on that capital and sales have both fallen. This could explain why the stock has sunk a total of 74% in the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know more about Modern Healthcare Technology Holdings, we've spotted 4 warning signs, and 1 of them is a bit unpleasant.

While Modern Healthcare Technology Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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